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Value investors search for stocks that appear underpriced relative to their intrinsic value, which is based off of company metrics such as earnings or book value. One helpful way to find undervalued opportunities is from the “godfather of value investing” himself, Benjamin Graham.

Graham created an equation to calculate the maximum fair value for a stock, referred to as the Graham Number. Any stock trading at a significant discount to this number would appear undervalued.

The Graham Number only requires two data points: current earnings per share and current book value per share. 
The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). 

This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.

We used the Graham Number to screen for potentially undervalued stocks among the universe of large-cap stocks paying dividend yields above 2%.

‪Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.‬




We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

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Do you think the market is undervaluing these names? Use this list as a starting point for your own analysis.

List sorted by potential upside implied by Graham number.

1. Raytheon Co. (NYSE:RTN): Provides electronics, mission systems integration and other capabilities in the areas of sensing, effects and command, control, communications and intelligence systems, as well as mission support services in the United States and internationally. Market cap of $14.41B. Dividend yield at 4.22%, payout ratio at 30.51%. TTM Diluted EPS at $5.44, MRQ Book Value Per Share at $28.85, Graham number at $59.42 (vs. current price at $42.85, implies a potential upside of 38.68%). The stock has lost 7.76% over the last year.

2. Entergy Corporation (NYSE:ETR):
Operates as an integrated energy company in the United States. Market cap of $11.21B. Dividend yield at 5.27%, payout ratio at 46.76%. TTM Diluted EPS at $7.06, MRQ Book Value Per Share at $48.62, Graham number at $87.88 (vs. current price at $64.59, implies a potential upside of 36.06%). The stock has lost 17.08% over the last year.

3. Edison International (NYSE:EIX): Engages in the supply of electric energy in central, coastal and southern California. Market cap of $11.62B. Dividend yield at 3.59%, payout ratio at 39.39%. TTM Diluted EPS at $3.20, MRQ Book Value Per Share at $32.92, Graham number at $48.69 (vs. current price at $36.89, implies a potential upside of 31.97%). The stock has gained 6.45% over the last year.

4. Time Warner Inc. (NYSE:TWX): Operates as a media and entertainment company in the United States and internationally. Market cap of $31.33B. Dividend yield at 3.13%, payout ratio at 35.96%. TTM Diluted EPS at $2.32, MRQ Book Value Per Share at $30.15, Graham number at $39.67 (vs. current price at $31.26, implies a potential upside of 26.91%).

5. AFLAC Inc. (NYSE:AFL):
Provides supplemental health and life insurance. Market cap of $15.84B. Dividend yield at 3.54%, payout ratio at 30.74%. TTM Diluted EPS at $3.80, MRQ Book Value Per Share at $25.65, Graham number at $46.83 (vs. current price at $36.91, implies a potential upside of 26.88%). Might be undervalued at current levels, with a PEG ratio at 0.74, and P/FCF ratio at 2.03. It's been a rough couple of days for the stock, losing 9.06% over the last week.

6. Sempra Energy (NYSE:SRE):
Engages in the development of energy infrastructure, operation of utilities and provision of energy-related products and services worldwide. Market cap of $12.26B. Dividend yield at 3.78%, payout ratio at 35.42%. TTM Diluted EPS at $4.85, MRQ Book Value Per Share at $40.01, Graham number at $66.08 (vs. current price at $52.19, implies a potential upside of 26.61%). The stock has lost 1.34% over the last year.

7. Carnival Corporation (NYSE:CCL): Operates as a cruise and vacation company. Market cap of $24.12B. Dividend yield at 3.28%, payout ratio at 29.02%. TTM Diluted EPS at $2.40, MRQ Book Value Per Share at $30.12, Graham number at $40.33 (vs. current price at $32.68, implies a potential upside of 23.41%). It has been a rough couple of days for the stock, losing 7.53% over the last week.

8. BlackRock, Inc. (NYSE:BLK): Provides its services to institutional, intermediary and individual investors. Market cap of $39.41B. Dividend yield at 3.61%, payout ratio at 23.76%. TTM Diluted EPS at $12.27, MRQ Book Value Per Share at $136.38, Graham number at $194.04 (vs. current price at $167.04, implies a potential upside of 16.16%). It has been a rough couple of days for the stock, losing 8.63% over the last week.

9. General Electric Co. (NYSE:GE):
Operates as a technology, service and finance company worldwide. Market cap of $161.66B. Dividend yield at 3.93%, payout ratio at 42.54%. TTM Diluted EPS at $1.27, MRQ Book Value Per Share at $12.08, Graham number at $18.58 (vs. current price at $16.12, implies a potential upside of 15.26%). Might be undervalued at current levels, with a PEG ratio at 0.86, and P/FCF ratio at 10.26. The stock has gained 1.8% over the last year.

*EPS and BVPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 9 Large-Cap Dividend Stocks Undervalued By Graham